CMS to Close Medicaid Loophole for 14 States This Winter, Completely Phase Out by 2010
The Bush administration announced yesterday that it will end the use of the Medicaid loophole for 14 states this winter, and completely phase out the accounting technique by 2010, the AP/Washington Post reports. CMS Administrator Tom Scully said that new regulations issued earlier this year to limit the size of the loophole were "not restraining costs." Closing the loophole will save the federal government $9 billion over five years, money that would have gone to states that use what are known as Medicaid upper payment limits to receive additional federal matching funds. Under the loophole, state governments "massively inflate" their payments to state- or county-owned facilities beyond the actual cost of health services. The state then receives federal matching funds for the overpayments and has the facilities return the extra payments to the state coffers, where they can be used for any budgetary purpose (Sherman, AP/Washington Post, 11/21). According to an HHS release, this practice "effectively resulted in states obtaining excessive federal Medicaid payments without putting up the state share required by law or assuring that the additional money was being used for Medicaid-related expenses" (HHS release, 11/20).
A Clinton administration rule issued last January set the upper payment limit at 150% of the Medicare rate for any one service; the new rule closing the loophole, which Scully said will probably become final in February, will reduce the limit to 100% of the Medicare rate. Scully said the 14 states that will have their inflated payments "cut off" when the rule is finalized are: Colorado, Florida, Georgia, Idaho, Indiana, Kentucky, Michigan, Minnesota, Montana, Nebraska, New York, South Carolina, Texas and Washington. "There's going to be gnashing and screaming, but really the policy is indefensible," Scully said. He added that California and Illinois, which have used the loophole primarily to fund public health services, "will not be affected for three years and will receive some inflated payments until 2010" (AP/Washington Post, 11/21). Four other states also fall into this category (HHS release, 11/20).
California health officials and lawmakers criticized CMS' decision to close the loophole, saying the move would cost the state $300 million of the $1 billion that its 73 safety net hospitals receive from the federal government each year. The Los Angeles Times reports that the Medicaid upper payment limits were originally designed to help hospitals that serve large numbers of indigent patients, and that California -- the first state to use the loophole -- has used its extra federal funds for health care purposes (Rosenblatt/Riccardi, Los Angeles Times, 11/21). "California has a proven track record of using the UPL system efficiently and effectively. As a result of today's decision, millions of Californians will suffer," Rep. David Dreier (R-Calif.) said (AP/Washington Post, 11/21). Rep. Sam Farr (D-Calif.) agreed, saying, "They have just made it harder for states who play by the rules to serve the health and medical needs of their communities." Other members of California's congressional delegation joined Dreier in saying they will challenge the proposed rule, which will be made available for public comment on Nov. 23. Health officials said the loss of the federal funding would severely hinder services to the poor and uninsured. Fred Leaf, acting director of the Los Angeles County Department of Health Services, which is facing a projected $884 million deficit in four years, said that closing the loophole would cost the county roughly $18 million in the first year and up to $125 million per year by 2010 (Los Angeles Times, 11/21).This is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.